Understanding Liens and Encumbrances in Real Estate

What Are Liens and Encumbrances?

An encumbrance is any right or interest held by a third party in real property that may reduce its value or limit its use, even though the owner keeps title. Encumbrances fall into two major groups: liens, which are financial claims against the property, and non-financial encumbrances, such as easements, restrictive covenants, and encroachments. Real estate paralegals review title commitments, order and examine title searches, prepare closing documents, and coordinate lien releases, so exam questions on this topic reflect everyday practice.

Understanding Liens

A lien is a legal claim against property that secures payment of a debt. If the debt is not paid, the lienholder may be able to foreclose and force a sale of the property. Liens may be voluntary, created by agreement of the owner, or involuntary, created by law.

What Is a Mortgage Lien?

A mortgage or deed of trust is the most common voluntary lien. The borrower grants a security interest in the real property to secure a loan, evidenced by a promissory note. In a mortgage state, foreclosure usually requires a judicial proceeding. In a deed of trust state, a trustee may sell the property by nonjudicial foreclosure after default and notice. Priority among mortgages is generally determined by the recording acts.

What Is a Judgment Lien?

When a creditor wins a money judgment, it can usually record or docket that judgment in the county where the debtor owns real property, creating a lien on the debtor's land. Judgment liens generally last for a set number of years and may be renewed. Homestead exemptions in many states protect part of a homeowner's equity from judgment creditors.

What Is a Mechanic's Lien?

Contractors, subcontractors, and suppliers who improve property and are not paid may file a mechanic's (or construction) lien against it. These liens are statutory, with strict requirements on preliminary notices, filing deadlines, and enforcement lawsuits. Many states give mechanic's liens relation back priority, meaning priority may date back to the start of work, which can place them ahead of a later recorded mortgage. Strict compliance with deadlines is crucial, and calendaring them is a typical paralegal task.

What Are Tax Liens?

Unpaid property taxes create a lien that generally has super priority over most other liens, including earlier recorded mortgages. Failure to pay can lead to a tax sale. Federal tax liens arise when the IRS assesses a tax, demands payment, and the taxpayer does not pay, and the IRS may file a notice to protect its priority against later creditors. Special assessments for municipal improvements may also be liens.

Other Liens

• Vendor's lien: Securing the unpaid purchase price owed to a seller.
• HOA liens: Securing unpaid association assessments, sometimes with limited priority over first mortgages.
• Lis pendens: A notice that litigation affecting title is pending. It is not a lien itself, but it puts buyers on notice.
• Child support liens: Created by statute in many states.

Non-Financial Encumbrances

What Is an Easement?

An easement is a nonpossessory right to use another's land for a specific purpose, such as a right of way or a utility line. Easements can be created by express grant or reservation, implication, necessity, or prescription. An easement appurtenant benefits a particular parcel and runs with the land. An easement in gross benefits a person or entity, such as a utility company, regardless of land ownership.

What Is a Restrictive Covenant?

A covenant restricts how land may be used, such as limits on building types or commercial activity. To run with the land at law, a covenant must touch and concern the land, be intended to bind successors, and satisfy privity requirements. Equitable servitudes can be enforced by injunction when there is notice and a common scheme or writing that meets the statute of frauds. Covenants are common in planned communities and are enforced by homeowner associations.

What Is an Encroachment?

An encroachment occurs when a structure, such as a fence or driveway, extends onto neighboring land. Encroachments can lead to adverse possession claims or easements by prescription if the use is open, notorious, continuous, hostile, and exclusive for the statutory period.

Priority Rules and Recording Acts

Priority generally follows the rule of first in time, first in right, modified by the recording acts, which protect subsequent purchasers who record first. The three types are:

• Race: The first to record wins, regardless of notice.
• Notice: A subsequent bona fide purchaser for value without notice prevails over an earlier unrecorded interest.
• Race-notice: A subsequent purchaser prevails only if they have no notice and record first.

Notice may be actual, constructive (from the record), or inquiry notice from facts such as possession. Purchase money mortgages receive priority over other liens against the buyer in most cases.

Title Searches and Title Insurance

Before closing, a title search examines the chain of title in the public records for deeds, mortgages, liens, easements, and other matters. The title company issues a commitment listing requirements and exceptions. Title insurance protects owners and lenders against covered defects, but it excludes matters listed as exceptions, such as known easements or matters a survey would reveal. Paralegals review the commitment, request copies of exceptions, clear requirements, and prepare payoff letters so that liens are released at closing.

Removing Liens

• Payment and satisfaction: Pay the debt and record a release or satisfaction of mortgage.
• Bonding off: Post a bond to remove a mechanic's lien.
• Foreclosure: A senior lienholder's foreclosure typically extinguishes junior liens, which must be given notice.
• Quiet title action: A court action to resolve competing claims and clear title.
• Expiration: Some liens end by statute after a set period unless renewed.

Study Tips

When you meet a lien question, identify the type of lien, how it was created, and whether it was recorded, then apply the priority rule. Build this process with our paralegal flashcards, create your free account at ParalegalPrep signup for practice questions, and review the full plan options on the pricing page.